Capital’s underground cash markets

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Capital’s underground cash markets

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Street money vendors in Namdaemun Market exchange money for customers. The vendors are mostly middle-aged women. By Oh Sang-min

The Namdaemun and Myeongdong areas - both prime tourist attractions in downtown Seoul - have long made their names with vibrant traditional open-air markets and as homes to hundreds of stores selling the best known cosmetics and clothing lines.

But behind the glitzy, wide thoroughfares clamoring with shouts of street merchants and laughter of lighthearted shoppers and tourists lie back alleys serving as the nation’s notorious underground financial market.

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Currency exchange vendors at Namdaemun Market negotiate deals with customers. By Oh Sang-min

Myeongdong has long been a home to hundreds of private lenders catering to small companies, while the money exchange business on Namdaemun streets has become a big business ungoverned by regulators or tax collectors.

Both businesses, though having gone through numerous minor ups and downs, have mostly thrived in the neighborhoods for decades, serving companies turned down by mainstream banks, individuals trying to pass their wealth to offspring without letting tax authorities know about it, or local individuals and foreigners trying to get better currency exchange rates.

The history of these businesses dates back to the 1910-45 Japanese occupation, when in 1922 the regime established what later became the nation’s first stock exchange bourse in the heart of Myeongdong. (The building that housed the stock market still stands in the area right across from the Metro Hotel in Myeongdong and is currently occupied by SC First Bank’s Myeongdong branch). With the nation’s two most influential financial establishments - the stock exchange and Bank of Korea - in the area, it was natural for banks and stock brokerage houses to sprout up nearby.

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A scene in the back alley in Myeongdong, with a glass booth that advertises on its window that they deal with “stocks, corporate notes, commercial papers and bonds.”[JoongAng Ilbo]

And it was also natural for private lenders to open businesses in the vicinity to lure those who were turned down by mainstream banks.

“Myeongdong was the perfect place with all sorts of traffic passing through, so money and people were bound to gather there,” Choi Yong-geun, a legendary private lender in the area, said in his memoir “50 Years of Myeongdong,” which chronicled the history of the neighborhood and his three decades there. “Myeongdong was the old Korean equivalent of Wall Street.” Company owners or finance managers borrowed money by issuing commercial paper, unsecured, short-term debt instruments, to the private lenders.

There were lending brokers who worked as an intermediary between desperate company owners and the private lenders whose biggest fear was being unable to get repaid. The brokers are known to have deep knowledge about every single won on the borrower’s balance sheet, sometimes even more than official industry analysts. This helped the private lenders pick the most financially stable companies while avoiding ones headed for bankruptcy. And behind these private lenders also lie the financial backers called jeonju (literally meaning money owner), enormously wealthy individuals seeking to reap a greater return from their cash reserves without their income being tracked by tax authorities.

“Unlike TV dramas where private lenders are depicted as bad guys sucking blood out of poor people, Myeongdong private lending market is a center of corporate finance,” said one retired private lender in the area who declined to be named. “Here, even some bank officials struggle to maintain relations with us to get the most confidential and valuable information we have about the management and finances of local companies.”

Indeed, the latest news from the Myeongdong private lending market also offers a glimpse into the undercurrent of the nation’s economy. When the nation suffered during the 1997-98 Asian financial crisis, even household-name companies here took to the street to sell commercial paper and bonds to the private lenders with discounts deeper than ever before. For instance, even corporate notes of Samsung Electronics, which were rated A, were sold at a rate of 1.8 percent a month, meaning even Korea’s biggest corporate superstar had to offer interest rates of more than 20 percent a year to secure cash.

And Myeongdong was flooded again with owners and financiers when the global recession hit in 2008. With talk of the possible collapse of many local builders and exporters, these companies were no longer able to borrow money from mainstream banks or even so-called second-tier financial institutions - mutual savings banks and capital companies. So the companies ended up roaming the streets of Myeongdong trying to find potential buyers to purchase their corporate notes and commercial paper even at interest rates unseen for years.

“But many of them ended up selling nothing, because the market sentiment was so bleak,” said the retired private lender who declined to be named. “Even companies rated BB or higher, considered relatively healthy in the market, had problems finding potential note buyers.”

But despite the recent barrage of potential borrowers, Myeongdong’s private lending market has faced a slow decline. Since its heyday, a series of government measures to make once-anonymous corporate paper trading more transparent and switch the system from a paper-based to an online-based one, more and more people seeking anonymity in financial transactions have left the market. The number of private lenders operating in the neighborhood has shrunk from more than 100 to fewer than 50.

Other decades-long fixtures in the nearby Namdaemun area are older ladies sitting on the main streets, whispering to tourists and passersby: “We buy U.S. dollars. We’ve got Chinese yuan, too.” Some 20 to 30 street money exchange vendors, women wearing rustic hats and rumpled clothes and sitting on small stools may not strike you as people with big business importance. But in the fat pouches strapped around their waists or shoulders lie stacks of U.S. dollars, Korean won, Japanese yen and Chinese yuan worth some thousands of dollars or even more.

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And one may think their prime targets are foreign tourists crowding the nearby Namdaemun market and Myeongdong, but they have many major clients. Customers range from giddy tourists trying to exchange $100 for Korean won to immigrant workers, foreign students in Korea and even wealthy Koreans trying to exchange stacks of their U.S. dollars into Korean won without being detected by the government and at a good rate.

The money exchange market in the area traces its roots to the 1950s when racking up U.S. dollars was considered one of the fastest and most efficient ways to build reliable wealth. In a postwar Korea lacking any industrial products, those who imported essential items from overseas which were sold in Namdaemun market earned a quick fortune. The dollar supply provided by these traders, coupled with the dollar influx from nearby U.S. military bases, soon created a big market for money exchange dealers. And that’s when the ladies, some now in their 60s, started working as the money exchange vendors. Their biggest asset is the deep, decades-long connection with wholesale currency dealers and Namdaemun merchants, only a phone call away. Their tables on the street are strewn with handheld calculators, cell phones and stacks of business cards with phone numbers and business aliases. All you need to start an exchange is to ask “What’s the rate?” You neither need to present your identification card nor sign paperwork.

The weakening won earlier this year sparked a fleeting business boom for the exchangers as more Koreans who hoarded a big dollar reserves in their closets took to the streets to sell their money at the favorable rates unseen for years, said one money exchange who declined to be named. An explosive growth of foreign tourists, especially those from Japan, also kept the money exchangers busier than ever before, giving a fresh boost to the increasingly aging market with few young job seekers.

But, one said, “you will see some women in their 30s who recently entered the market.”


By Jung Ha-won [hawon@joongang.co.kr]
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